How Is Debt To Income Calculated- this is one important calculation to let you know if you can qualify for a mortgage loan…post updated 4-7-23
With mortgage interest rates still on the rise, but slightly lower as of today, there are still questions regarding qualifying for a mortgage loan. With rates per Mortgage News Daily Trends still at 6.340% +- depending upon the lender- as of 04/07/23.
There is a lot going on with the economy-high prices, high-interest rates, and fewer mortgages being originated. Why? Because some borrowers cannot afford what they could afford as of January 2022. However, don’t give up…unless, of course, you need to.
What Is The Debt To Income Ratio
The debt to income ratio tells a mortgage lender how much house you can or cannot afford. It is a combination of housing expenses plus other obligations and is divided by the monthly income of the applicant.
What is included in the housing expense:
- Mortgage Payment (principal & Interest payment)
- Taxes and insurance (yearly taxes on the property, plus homeowners insurance)
- HOA fee (if a condo or PUD)-Home Owners Association fee for these property types
- MI ( mortgage insurance is required with a loan to values greater than 80%
What is included in the monthly debt obligations of the applicant:
- Any installment loan over 10 months *car loans, personal loans, student loans, etc.
- Revolving charges (credit cards, lines of credit, etc.)
- Alimony (if applicable) *and separate maintenance
- Child Support (if applicable)
- Co-signed Mortgage ( unless proof is available the payment has been paid by the other loan applicant and has not been delinquent within the past 12 months *and the borrower is not using rental income to qualify for the loan
- Non-Mortgage co-signed loans do not have to be counted when another party is making the payments *lender may have a separate policy for these loans
- Bridge loans/Swing Loans
- Any deferred payments on loans-Student loans
- Federal Income Tax Installment Payments
- Garnishments * with payment extending greater than 10 months
Example of Income
Borrower Monthly Income:
- Base Monthly Salary – this is usually a figure that is calculated by how the individual is paid Monthly, bi-weekly, or twice a month
- Example of calculations for income
- Borrower 1- Annual salary = $75,000 ÷ 12 months – $6250 monthly
- Borrower 2- Bi-weekly income of $1580 x 26= 41080 ÷ 12 = $3423.33 monthly *usually rounded
- A borrower who is paid 2 times a month = $2000 x 24=$48,000 ÷ 12 = $4000 monthly income
- A borrower who is paid weekly = $650.00 x 52 weeks = $33800 monthly ÷ 12 =$2816.67 monthly
Example of Housing Plus Debt to Get the Debt to Income Ratio **using a modest SP & Appraised Value
Sales Price of $350,000 x 5% downpayment of $17500=
Mortgage Loan Amount of $332,500 x 6.620% = Principal & Interest Payment of $2128
Prin & Int Payment – $2128
Taxes 200 *estimates only go to the calculator
Insurance 185
MI (mtg Ins) 110 *5% downpayment making this a 95% Loan to Value with a loan amount & the appraised value of $350,000
Total Housing Exp—-$2623
*Estimates only as all taxes, insurance, etc. This could be more or less and these costs are determined by the property state in which you live (especially the taxes. **Also if your downpayment is more, these items will vary accordingly. Mortgage Insurance (MI) is determined by the loan to value and if there is a 20% downpayment no MI is needed. The more your downpayment the less your MI will be.
Credit Obligations/Debts on The Credit Report- Mortgage Income Analysis
***and other applicable sources *such as child support being reported sometimes on pay stubs
All debts should be acknowledged upfront as this will save you time and possibly money. An example goes like this for credit obligations:
Car payment – $400.00 monthly
Personal Bank Loan $155.00 monthly
Credit Card 50.00 monthly
Credit Card 50.00 monthly
Furniture Payment of 50.00 monthly
Total Debts 805.00 Monthly
**From Above
Housing Expense $2623 = Total New Home Expense
Other Obligations 805
Total Debt Load $3428
The Average Household income was $70784 for 2021 **using this as we cannot calculate your debt to income without viewing documentation such as paystubs/W-2s, or credit information *credit reports. **All of these calculations are estimates just to show you how it is done in real-time. You can calculate your income based on the guidelines above and debts per what you payout monthly
Monthly Income Calculation = $5899
Income $5899 ÷ $3428 = 58.11% Debt to income
This debt to income is as we have stated estimated on all of the above. However, if this were the true calculations as a prior mortgage loan underwriter this loan would *probably not be approved as is. The debt to income is too high.
An acceptable debt-to-income ratio is somewhere between 36% to 45%. If a loan is underwritten in Desk Top Underwriter (FNMA) or Loan Prospector (FHLMC) and all of the information is correct and the automated system gives an approval usually the Mortgage Lender will make the loan.
I actually doubt that the above DTI would be approved without extreme circumstances. The normal usually is 45% or less. Yes, there are times when exceptions are made, there could be an exception made by the underwriting system or the lender. The underwriter wants to make sure the mortgage will be paid in a timely manner. If there is debt overload, there is no guarantee.
**A very good plan when applying for a mortgage loan is to make sure your debts are minimal. The less debt you have the better terms you will get, and it is easier to get approved for a mortgage.
